Crude rallies on rising demand, Gulf storm, Russia

Natural gas gains 4% with hurricane season under way

By

PolyaLesova

NEW YORK (MarketWatch) -- Crude-oil futures rallied Monday, boosted by a combination of factors, including an increase in fuel demand, escalating tensions between Russia and the West, and the risk of a cyclone hitting the Persian Gulf.

Crude for July delivery closed up $1.13 at $66.21 a barrel on the New York Mercantile Exchange.

"We had a report from the Energy Department measuring total implied fuel demand in the U.S. at an average 20.9 million barrels in the four weeks that ended May 25," said Sean Brodrick, a contributing editor at MoneyandMarkets.com.

"That's up 2.4% from the same period a year earlier, and with refinery capacity so tight, there is no room for error," he said. "Higher fuel demand is pulling everything higher."

Prices were also strengthened by expectations that Cyclone Gonu will hit the Persian Gulf in the next 24 hours. The U.S. Navy has warned coalition military ships in the Gulf to avoid the cyclone, Zawya Dow Jones reported Monday.

"By June 1, we experienced our second name storm of the 2007 hurricane season," Brodrick said. "That is a strong argument for a very busy season indeed, maybe for reasons that aren't factored in the models yet."

"I think traders are starting to price in the potential for a real blow-down season," he said.

Tom Kloza, chief oil analyst at the Oil Price Information Service, said: "There will be talk about the cyclone headed for Oman, as well as the various global tensions that one can grab on any day."

"The truth is that there is no risk in buying crude at these levels among refiners, given the huge profits available by selling gasoline and heating oil," Kloza said.

On Friday, crude futures finished up $1.07 a barrel after reaching a one-week high of $65.23, while the reformulated-gasoline contract closed up 1.8%, adding 4.14 cents a gallon. The crude contract ended 12 cents lower on the week.

Escalating tensions between Russia and the West were also providing background support to prices.

"There has been concern about the rising geopolitical risk in Russia as well as the risk of a tropical storm in the Persian Gulf area as well as the British Petroleum issue," said Phil Flynn, a senior analyst at Alaron Trading.

Russian President Vladimir Putin has said that his country is preparing to retaliate if the United States builds missile defense systems in Europe, the BBC reported Monday. Read more about Russia.

"The situation with Russia is starting to be more of a concern," Flynn said. There are worries "about the beginning perhaps of a new Cold War," he said. Russia at the same time is threatening to revoke BP's license at its giant Siberian oil field, Flynn added.

BP
BP, -0.39%
declared a "force majeure" on Canadian crude supply to its Whiting, Ind., plant Friday, meaning that the company cannot meet its contract requirements to purchase oil from Canadian suppliers to the refinery.

"Supplies of gasoline are going to remain tight and keep up pressure on prices," Flynn said.

Earlier Monday, crude oil had fallen on news that a militant group responsible for a string of attacks in the Niger Delta region announced a month-long ceasefire.

"We will suspend attacks on oil installations for one month -- a period which we hope the government will take advantage of to ruminate on positive and realistic measures toward a just peace," said a spokesman for the Movement for the Emancipation of the Niger Delta, according to the Associated Press.

In other news, U.S. Colonial Pipeline Co. reopened a section of the line between Atlanta and Greensboro, N.C., that had been closed since May 29.

Also on Nymex Monday, July natural gas rose 31.3 cents, or 4%, at $8.191 per million British thermal units.

"Natural gas is very strong right now," Flynn said. "This is probably weather related and a reminder that the hurricane season is moving along."

July heating oil closed up 4.18 cents, or 2%, at $1.9646 a gallon.

"Precisely why it is up more than 5 cents a gallon is a bit of a mystery, but the foreign equivalent of our U.S. heating oil -- gas oil -- is up some 6.4 cents a gallon and the U.S. market has followed with a 5-cents-a-gallon-plus gain of its own," Kloza said.

"This is typically a very, very soft month for this product, but the gasoline market proved that products can rally well before their 'season,' and they can rally to formerly unheard of numbers vs. crude," he said.

In other commodities trading, gold futures failed to find a foothold in positive territory Monday as traders locked in gains late in the session following the metal's rally last week. See Metals Stocks.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.